When are adjusting entries typically made?

Adjusting entries are crucial for ensuring that the financial statements accurately reflect the company’s financial position and performance at the end of an accounting period. They are typically made after all transactions have been recorded during that period but before financial statements are prepared. This is because adjusting entries allow businesses to update account balances for accrued and deferred items, which must be recognized to comply with the accrual basis of accounting. This principle dictates that revenues and expenses should be recognized when they are earned or incurred, rather than when cash is exchanged.

For example, adjusting entries would include recognizing earned revenue not yet billed, or expenses that have been incurred but not yet paid. Since these adjustments are essential for producing accurate financial reports, they are performed at the end of each accounting period, ensuring that the financial statements present a true and fair view of the company's financial situation for that period.